A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Cars.com (CARS)
Trailing 12-Month Free Cash Flow Margin: 17.6%
Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE: CARS) is a digital marketplace that connects new and used car buyers and sellers.
Why Do We Think Twice About CARS?
- Likely needs to improve its platform or increase its marketing budget for penetration to accelerate as its dealer customers were flat over the last two years
- Estimated sales growth of 1.4% for the next 12 months is soft and implies weaker demand
- Earnings per share have contracted by 15.6% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
At $10.55 per share, Cars.com trades at 4.6x forward EV/EBITDA. Check out our free in-depth research report to learn more about why CARS doesn’t pass our bar.
Live Nation (LYV)
Trailing 12-Month Free Cash Flow Margin: 6.7%
Owner of Ticketmaster and operator of music festival EDC, Live Nation (NYSE: LYV) is a company specializing in live event promotion, venue management, and ticketing services for concerts and shows.
Why Do We Think LYV Will Underperform?
- Annual sales growth of 5.1% over the last two years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Free cash flow margin is forecasted to shrink by 2.7 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
Live Nation is trading at $177.95 per share, or 125.5x forward P/E. Read our free research report to see why you should think twice about including LYV in your portfolio.
Kroger (KR)
Trailing 12-Month Free Cash Flow Margin: 1.6%
With a sprawling network of over 2,400 locations offering digital pickup services, Kroger (NYSE: KR) operates supermarkets, pharmacies, and fuel centers across 35 states, offering customers groceries, household items, and private-label products.
Why Does KR Fall Short?
- Products fail to spark excitement with consumers, as seen in its flat sales over the last three years
- Conservative approach to adding new stores shows management is focused on improving existing location performance
- Gross margin of 23.9% is below its competitors, leaving less money for marketing and promotions
Kroger’s stock price of $62.62 implies a valuation ratio of 11.8x forward P/E. To fully understand why you should be careful with KR, check out our full research report (it’s free).
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